Rich Madaleno on Taxes

In a thoughtful diary on Free State Politics, Sen. Rich Madaleno outlined changes in tax rates and the State's fiscal outlook since the special session, and why he opposed the surcharge on people with annual incomes over $1 million which passed the General Assembly. As it turns out, my past posts on this topic woefully underestimated the gap in tax rates between Maryland and Virginia for these very high-income taxpayers:

Our actual work this year began last October when Governor Martin O'Malley called the General Assembly back to Annapolis for an extraordinary special session to address the state's fiscal problems. In just four weeks of work, the General Assembly and Governor O'Malley worked out a comprehensive fiscal solution that included $600 million in spending reductions and $1.3 billion in tax increases to fund the state's general operating and transportation budgets.

The tax increases included raising the sales tax rate from 5% to 6%, raising the corporate income tax rate from 7% to 8.25%, and reconfiguring the personal income tax rates. Maryland's previous top rate was 4.75% for all income over $3,000. The new, more progressive rates result in a .25% rate increase (to 5%) for income over $150,000 and a .75% rate increase (to 5.5%) for income over $500,000. As a result of increases to the personal exemption and the new rates, people earning less than $100,000 will pay less in income taxes while people making more than $150,000 will pay more.

As you know, the General Assembly also authorized a referendum on the issue of slot machine gambling. If passed this November, the slots plan will authorize a maximum of 15,000 machines in five predetermined locations around the state. By the end of the special session, we were able to finally eliminate the state's ongoing structural deficit.

The regular session had the odd feel of a hangover after our frenetic fall session and opened with a real sense of melancholy following the unexpected deaths of three colleagues. Additionally, our new-found structural balance was not to last long as the nation's worsening economic condition began to take its toll on our projected revenues. In fact, much of the regular session's work seemed to revise, rewrite, or repeal our work from the special session.

While the governor's initial budget proposal in January was balanced to our original revenue estimates, state revenues from the income tax and sales tax both fell significantly below projections in the first quarter. These two revenue sources account for more than 80% of the state's tax revenues. When they fall, the budget quickly falls back into the red.

January's year-over-year growth in sales tax revenue alone saw the deepest decline in 15 years. This situation is not isolated as similar steep drops were seen by Virginia and the District of Columbia. As a result, the state's official revenue estimate was decreased by $330 million.

At the same time, fierce opposition to one of the new taxes passed in November began to push the legislature to repeal the expansion of the sales tax to computer services. The technology industry made a strong case that this tax would make Maryland tech firms uncompetitive especially with Virginia-based companies. However, this new tax was slated to produce $200 million in new revenue. When the decision was finally made to repeal this "tech tax," the General Assembly was faced with a $530 million shortfall.

To address this problem, I strongly advocated for a reduction in spending including a scaling back of the new spending initiatives we had enacted during the special session. These new initiatives included funding for transportation enhancements, health care expansion, Chesapeake Bay clean up, and higher education access. The General Assembly went along with the cuts to health care, bay clean up, and higher education but balked at reductions in the funding increase for transportation, which I proposed scaling back. Instead, the governor proposed another personal income tax bracket for income over $1 million. This new bracket will be 6.25% and will last for three years. When combined with the local income tax rate of 3.2% in Montgomery and Howard Counties, our new top bracket of 9.45% will be the third highest tax rate in the country and will be 75% higher than the top rate in Virginia.

It may be hard to pity the just more than 6,000 taxpayers who will be impacted by this tax. However, these few people, most of whom derive income from business ownership, account for nearly 20% of the income taxes paid to the state. In Montgomery County, where 40 percent of these taxpayers live, they account for almost 25% of the county's income tax revenue. I fear this new tax rate, which is a 30% increase over the old top rate, will seriously diminish our ability to retain or attract new businesses. Should even 500 of these taxpayers leave or simply declare residency in another state, by wintering longer in Florida for example, our state and county could see a significant reduction in tax revenues.

As a result of the deteriorating economy and last minute revisions to our tax code, I leave Annapolis this year, frankly, with a great deal of concern about our state's long-term fiscal outlook. Even with all of the difficult decisions of the past six months, we are still facing a serious fiscal situation. The economic news seems to get worse by the week. Energy prices continue to rise while home values fall. Job growth has stopped, and the stock markets are volatile. Should the slots referendum fail in November and the economy perform as anticipated; the state will once again be facing a nearly billion dollar structural deficit.

I sincerely hope this does not occur, but I believe we need to plan for the worst. That is why I proposed additional spending reductions to close our short-term deficit. During the committee debate on the tech tax repeal and income tax swap bill, I proposed an amendment to reduce General Fund support of the Transportation Trust Fund by $150 million annually. This was a cut in one-half of the sales tax revenue diversion we implemented during the special session.

My amendment would still have provided $4 billion next year for transportation operations and construction and $6 billion for construction projects over the next six years. It would also have left transportation with at least a $300 million annual enhancement. I was only proposing a reduction in the increase not a reduction in current services or projects - a modest one-third reduction in the increase.

Some of my colleagues have said they voted against my amendment due to our region's traffic problems. A review of the new projects proposed by the department to be funded with this new revenue reveals, in my opinion, few which will impact traffic in any meaningful way. For example, the only new Montgomery County road projects that will be funded by the new money allocated during the special session are intersection improvements around the Bethesda Naval Hospital to prepare for the relocation of Walter Reed, a new grade-separated interchange at Georgia Avenue and Randolph Road, planning for a new interchange on I-270 at Watkins Mill Road, and planning for improvements along Georgia Avenue from Forest Glen Road to 16th Street. I would argue that none of these projects will result in any improvement to congestion except for traffic flow in the immediate vicinity of these intersections.